Finance - Financial Statements Flashcards
What do the financial statements of sole traders businesses consist of?
- Income statement
- Statement of financial position
What sections are apart of an income statement?
- Sale revenue
- Cost of sales - cost of sales = opening inventory + purchases - closing inventory
- Gross profit - gross profit = sales revenue - cost of sales
- Expenses
- Net profit - net profit = gross profit - expenses
What is the importance of an income statement to a business?
This will summarize revenues, costs and the profit/loss of the business. It also indicates the overall profitability of the business overall.
What is the statement of financial position?
It shows the value of the business’ assets, liabilities and net worth
Net worth = total assets - total liabilities
Assets are divided into non current and current assets, what are non current and current assets?
. Non current - assets that are more permanent in the business (machinery, vehicles, etc)
. Current - assets that can be quickly exchanged for cash (inventory, trade receivables, etc)
What are non current and current liabilities?
. Non current liabilities - liabilities borrowed for a longer time (bank loan)
. Current liabilities - liabilities that must be paid immediately (overdraft, trade payables)
What does the statement of financial position record?
. The business’ assets (divided into current and non current assets)
. The business’ liabilities (divided into current and non current liabilities)
. The owners capital (amount of their original investment)
. The owner’s drawings (cash or goods withdrawn from the business by the owner for their personal use)
. The net profit (transferred from income statement)
What is the importance of a statement of financial position to a business ?
It summarizes the assets, liabilities and capital for the business. It also indicates overall profitability and solvency for the business and allow the owner to review key aspects of financial performance
